Eager buyers formed huge lines last week for a chance to buy Apple's iPad 2 before it sold out.

Fund companies, excited to cash in on the Post-PC era of tablets and smart phones are trying to turn the Next Big Thing into the Next Big Investment.

The latest offering is an ETF that bundles together dozens of the sector's players into a Smart Phone index. In theory, it lets investors diversify in a number of stocks rather than putting it all in one,

Instead, it has shown how diversity can backfire when investing in sectors.

Much of the heat in the smart telephone market is generated by one company, Apple . It's not that others are failing to sell products. Overall smart phone sales soared 89 percent to 101 million in the latest quarter from the prior year, according to market researcher Canalys. Much of that comes from Apple-chasers like Motorola Mobility and Samsung Electronics <005930.KS>.

With so many so many new players it's tempting to look for winners other than Apple, whose stock is not cheap after nearly quadrupling in two years. It remains near its all-time high of $364 and seems priced for continuing high performance, if not perfection.

The new exchange-traded fund, the First Trust NASDAQ CEA Smartphone Index Fund , is designed to let investors play the mobile device trend more broadly by putting bets on more than one horse in the sector. In fact, it has about 73 different stocks.

The fund has attracted a respectable $15 million in the month it has been offered. But so far its performance has been disappointing. Since its debut, it has lost 11 percent.

Why has the fund fallen so much? And is it now a bargain? As with all ETFs, it pays to look beneath the labels and review the fund's actual content.

Not all device makers are prospering in the fiercely competitive mobile market of 2011. Gains for devices powered by software from Apple and Google in the United States have come at the expense of Research In Motion's Blackberry, for example. And Nokia tossed out its current software platform to tie up with Microsoft's Windows Phone 7.

Too much diversification can wash out any gains, as in the case of the smart phone ETF. It's hard to come out ahead if you bet on every horse in a race.

EQUAL WEIGHT FOR HEAVY WEIGHTS

RIMM and Apple have about equal weight in the ETF's index, followed closely by Nokia and Samsung. Since the fund debuted, its double-digit loss compares with Apple's smaller 2-percent decline while it topped the other main competitor, Blackberry maker Research In Motion's , which lost 13 percent.

Global smart phone giant Nokia

Jerry Jordan, manager of the highly-rated Jordan Opportunity fund , recommends a more targeted approach to profit from the stunning growth of mobile device usage.

Jordan's fund has outperformed 97 percent of competitors over the past five years, thanks in part to a well-timed bet on Apple and other stocks benefiting from the popularity of mobile devices.

Theoretically, you are always better picking two stocks than 12, but you better get the two right, he said. The best idea is to buy half of the basket, so you still have some diversification, but you are still applying some skill.

Along with Apple and Google, Jordan's fund owns a handful of related stocks like memory supplier SanDisk , which is not owned by the ETF, and chip designer Qualcomm , which is.

WHEN IT PAYS TO BUY STOCKS, NOT ETFs

It's likely that some stocks included in the smart phone ETF could be hurt by the iPad's popularity, analysts warned.

Some tech stocks are in a tablet bubble that is about to burst as it becomes clear most consumers prefer Apple's products, JP Morgan analyst Mark Moskowitz reiterated on Monday. That could hurt makers of competing tablets like Samsung and RIM.

Money managers often consider the strategic benefits of ETFs versus individual stocks in putting clients' money to work.

A few months ago, Roger Nusbaum, chief investment officer at Your Source Financial in Phoenix, Arizona, decided to switch some of his clients' energy exposure to coal-related stocks.

He thought that coal companies globally should benefit from rising energy demand, and opted for the Market Vectors Coal ETF which includes Chinese stocks like Yanzhou Coal Mining <600188.SS> along with U.S.-based producers like Peabody Energy .

But in the case of some fast-growing developing markets, Nusbaum skipped the ETFs entirely for more targeted exposure. The popular iShares MSCI Brazil Index Fund , for example, had significant exposure to the country's banks. Nusbaum was wary of the overall financial sector and opted to buy mining giant Vale SA instead as the better play on Brazilian growth.

For some themes or sectors, ETF will be the best choice and for some others they will not, Nusbaum said. It makes no sense that any single wrapper can be the best product for all times and all market segments.

(Reporting by Aaron Pressman. Editing by Richard Satran)

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